Oil futures prices surged above $54 a barrel Thursday after government data showed a sharp decline in the domestic supply of distillate fuel, which includes heating oil, leaving inventories about 8 percent below year ago levels.

Light crude for November delivery rose 78 cents to $54.42 in morning trading on the New York Mercantile Exchange (search). Brent for November delivery on London's International Petroleum Exchange (search) was up 13 cents to $50.18 per barrel.

November heating oil futures rose 1.69 cent to $1.516 per gallon, a new record.

"We're not in dire straits as far as supply goes, but we are certainly on the lower side of where we'd want to be," said Tom Bentz, a trader at BNP Paribas Futures in New York.

The approaching winter has focused traders' attention in recent weeks on heating oil and natural gas supplies, both of which have suffered in part from the lingering output snags in the Gulf of Mexico following Hurricane Ivan. Price changes in these fuels often trigger similar movements in crude futures.

The region's daily oil production is down 28 percent while natural gas production remains 14 percent lower than normal.

Yet while commercially available supplies of distillate fuel declined by 2.5 million barrels to 120.9 million barrels for the week ended Oct. 8, oil supplies grew by 4.2 million barrels to 278.2 million barrels. That was a bigger rise than was expected, but still leaves the nation's oil supply 3.5 percent below last year's level.

A pipeline explosion in Mexico had stirred market fears on Wednesday, while labor unrest in Nigeria has kept traders on edge all week.

OPEC (search) president Purnomo Yusgiantoro said it was demand, not a supply shortfall, that has caused prices to soar this year.

"Oil prices will continue to rise through the end of October because demand is robust," said Yusgiantoro, Indonesia's oil minister.

OPEC's pledges to boost production to around 30 million barrels per day have largely failed to cool prices as traders say the type of crude made available — with a higher sulfur content — is not desirable at this time.

While oil prices are more than 60 percent higher than a year ago, they are still around $27 below the peak inflation-adjusted price reached in 1981.

"I find it hard to see how prices can push so high, when the actual data coming through suggests that things aren't as bad as the market thinks it is," said ANZ Bank energy analyst Daniel Hynes said from Melbourne, Australia. "It seems to be really playing on expectations of a shortage," he said, adding that there wasn't really one yet.

But the world's excess capacity, or surplus, hovers at just about 1 percent of the world's daily demand of 82 million barrels of crude on the back of a dramatic rise in demand from China and India this year.

The Paris-based International Energy Agency (search) predicts world consumption will increase by another 2 million barrels daily in 2005.

A 30-inch oil line exploded in eastern Mexico on Wednesday. Enrique Fonseca, a spokesman for the Veracruz state civil defense agency, said workers from the government oil company Petroleos Mexicanos, or Pemex, had closed off the line and were trying to contain the spilled oil.

It was not immediately clear what the extent of damage was to Mexican production but it was enough to send shock waves through an already jittery market.

Also Wednesday, the president of Nigeria's largest oil workers' union, NUPENG, vowed Wednesday to turn off the spigots if authorities used heavy-handed tactics to end the protest.

"If there are arrests, we will change our strategy. ... We can move to stop operations 100 percent," Peter Akpatason said.

Nigeria, the world's seventh-largest oil exporter and the fifth-biggest source of U.S. oil imports, pumps out 2.5 million barrels of oil daily.

Both Nigeria and the Gulf of Mexico produce low-sulfur content crude, particularly desirable for refiners and in high demand currently.

Energy analyst Simon Wardell, from World Markets Research Center (search), said there is little sign that crude prices will ease in the short term with little or no new oil coming onstream to help boost global supply.

However, he added that crude inventories are not yet critically low.

"There is no question the balance is tight, but it may not be tight enough to warrant these prices," he said.

U.S. crude supply has been severely affected by Hurricane Ivan, which tore through the Gulf of Mexico in mid-September. Around 19.4 million barrels of crude has been shut in, and production down by nearly 28 percent since Ivan, the U.S. federal Minerals Management Service (search) said.